Dealpolitik: Buyer Beware–Avoid the Shareholder Meeting Trap

When a public company decides to do an acquisition, there is always a risk that the predator will become prey to a hostile bid as a result of the increased attention. And being taken over is probably just about last thing management wants as it is gets close to a strategic expansion.

But, as a few recent deals have shown, the risk a buyer will get burned increases enormously if it needs its own shareholders to approve the deal. Managements of public companies that want to remain independent would be well advised to learn from them.

Take Chiquita Brands International Inc., which signed a deal to acquire Fyffes plc last March. Chiquita is set to issue just under 50% of its shares to buy Fyffes through a tax inversion in which Chiquita will undergo a merger to become a subsidiary of a foreign holding company. Chiquita’s shareholders must approve the deal, and a meeting is set for Sept. 17.

On Monday, Cutrale Group and Safra Group jointly made an unsolicited offer to buy Chiquita for $13 per share in cash. That September shareholder meeting for the Fyffes deal now looks like a big weakness for Chiquita in terms of resisting a hostile takeover. On Thursday, Chiquita rejected their bid. Now, Cutrale and Safra can turn the September meeting into a referendum on their cash deal by arguing that a “no” vote on the Fyffes deals is effectively a vote for support of the cash buyout.

Chiquita doesn’t have to abandon hopes of remaining independent yet. It can still adopt a poison pill plan, which would effectively prevent Cutrale and Safra from buying Chiquita without the board’s approval. But if shareholders formally reject the Fyffes deal, the Chiquita board’s opposition to the hostile bid will be undermined. The shareholder action won’t turn over the keys to Cutrale and Safra, but it will, as a practical matter, cast a shadow over any further defensive action by Chiquita.

If Chiquita hadn’t agreed to buy Fyffes and instead followed the standard defense playbook, Cutrale and Safra would have been stymied for nearly a year in their takeover battle. Chiquita could have adopted a poison pill and, because it’s charter doesn’t allow shareholders to call a special meeting, Cutrale and Safra would have had to wait until the company’s next annual meeting in nine months to press their takeover bid. One wonders if Cutrale and Safra would have bothered.

A similar issue likely bolstered Tyson Foods Inc.’s bid for Hillshire Brands Co. earlier this year. Hillshire had earlier agreed to buy Pinnacle Foods Inc. for cash and stock in a deal that required Hillshire’s shareholders to approve the deal. Two bidders decided it was attractive to try to preempt that purchase, and Tyson won the auction. Once the bids for Hillshire were made public, its shareholders became less likely to approve the Pinnacle deal.

Without the need to go to shareholders for approval of an acquisition, Hillshire might still be independent. Although the shareholders of Hillshire may not be shedding many tears, it seems unlikely that management of Hillshire was seeking to sell the company by buying Pinnacle.

This issue also hems in targets already subject to hostile bids. For example, as Allergan Inc. attempts to block Valeant Pharmaceuticals International Inc.’s hostile bid, one alternative transaction to create value for Allergan shareholders would be a tax inversion. But such a move would involve an acquisition and would almost certainly trigger a shareholder approval requirement. Valeant and its co-bidder, Pershing Square Management LP, have been working hard to find a path to force an Allergan shareholder meeting. A tax inversion would hand one to them on a silver platter.

Even the prolonged fight that resulted in Men’s Wearhouse Inc. buying Jos. A. Bank Clothiers Inc. was likely affected by this conundrum. The deal began with Jos. A. Bank proposing to buy Men’s Wearhouse. To fund the deal, Jos. A. Bank planned to issue stock just under the limit that would have required shareholder approval. When Men’s Wearhouse turned the tables and made a hostile bid for Jos. A. Bank, Jos. A. Bank didn’t rebid. The need to obtain shareholder approval to issue enough shares to finance an increased offer probably helped seal that decision. Getting approval in the face of a cash bid at a premium is highly problematic. Instead, it chose a defensive transaction it could implement without a shareholder vote but ended up agreeing to sell itself to Men’s Wearhouse anyway.

The lesson to public companies that could be vulnerable to a hostile takeover is clear: Think twice before you do a deal that requires you go to shareholders.